Friday, October 31, 2008

Personally I think that is great news. The reasoning as to why the US has cut spending is not good news by any means (stock market, job loss, financial uncertainty, etc...) but the fact people have decided to cut spending can hopefully help them curve their long term spending habits. As a while the US spends more than we make, so we are never actually getting ahead at all, we(individually) are constantly falling behind.
We should always pay ourselves first before we even consider spending money. A good idea may be to automatically have 10% of your paycheck go into a savings account you rarely if ever look at, that way you are putting some money away for a rainy day.
This time of economic uncertainty can bring it to peoples attentions that that paycheck that gets deposited every week may sometime disappear, and you will have to find a way to pay bills and survive without for a period of time. I do not want anyone to lose their jobs, I just want the idea to be in their head that's its possible, that way we will as a whole stop spending like crazy and we can turn the savings rate from a negative to a positive.
Nobody will be there to bail you out as individuals when you lose your job, or you get a pay cut, or as an entrepreneur your customers cut their spending, therefore resulting in less profit each week. Living below our means, though boring and not fun is proven as the best way to get to personal financial solvency.

As soon as you cut your spending and put that extra cash into a savings account, you not only are saving that dollar value, but that money you saved is now working for you and gaining interest, so your then making extra money for yourself, passive income, making money for doing nothing.

Thursday, October 30, 2008

Oct. 30 (Bloomberg) -- Bryan Gunderson tried to master the intricacies of structured-equity investments until he lost his job at JPMorgan Chase & Co. Now he's learning the subtleties of Purple Hooters.

After collecting his last severance check in August and getting no offers from more than 100 resumes he sent to friends, companies and employment agencies, the 25-year-old graduate of Loyola College in Baltimore decided to go to B-school -- for bartending. ``It's come to the point where, yes, I need another job,'' said Gunderson, who has a bachelor's degree in finance and is looking for bartending work. ``I always frequent bars, so why not be on the other side?'' he said in an interview at New York Bartending School in Manhattan.

Gunderson lost his job amid a credit crisis that threatens to leave 165,000 people unemployed in New York City in the next 24 months, including 35,000 in the financial industry, according to the city's comptroller.

A growing number of out-of-work New Yorkers are turning to bartending, according to school directors. Enrollment in the American Bartending School in Manhattan climbed 53 percent from last October to 84 pupils, the most for the month in five years, director Joe Bruno said in an interview. ``This will be a huge year for us,'' Bruno said. ``Generally, when the economy is bad we do well because people need supplementary or primary income.''

Enrollment Gains

Gunderson recently graduated from the New York Bartending School, which has had an 18 percent jump in enrollment, said Tom Sisson, school director. The credit crisis and layoffs are driving the growth, said Sisson, who declined to say how many students he has.

``The increase I'm talking about, it's definitely that corporate, Wall Street, finance kind of thing,'' Sisson said. The number of people working in food and beverage services in the largest U.S. city climbed 3.6 percent in September from last year to 201,800, according to state Labor Department data. Employment in securities, commodities and other financial businesses fell 7 percent to 174,700. ``A lot of people that are looking for careers in other industries seek employment in our industry,'' said Chuck Hunt, executive vice president of the New York State Restaurant Association The 40-hour course offered at New York Bartending School costs $695 and typically draws ``physicians, attorneys, people in the corporate world, people who've suffered a job loss, people who are burned out and are having the so-called mid-life crisis,'' Sisson said.

Purple Hooters

At the final exam, students must pass a written test and mix 20 drinks in six minutes. An instructor picks the speed-test cocktails from a list of 200 that includes the Purple Hooter, made with vodka and raspberry liqueur, and the Red Devil, which contains Southern Comfort, sloe gin, amaretto, orange juice, vodka, triple sec and lime juice. Billy Achitsaikhan, 27, says he didn't worry about finding work again when he left New York to trek through Central America in 2006. The graduate of Skidmore College in Saratoga Springs, New York, said he had joined Morgan Stanley after internships at Bear Stearns Cos. and Smith Barney Holdings Inc.

``Two years ago, there were days when I would go to Wall Street and meet up with two different headhunters and they would literally offer me more than 10 jobs apiece,'' Achitsaikhan said in an interview.

Since he returned to Wall Street last month and posted his resume, ``no one has called me,'' he said. Achitsaikhan graduated from the American Bartending School on Oct. 17 and said he plans to look for bartending work.

Not Recession-Proof

The median annual income, including reported tips, for a full-time bartender in New York City was $30,540 as of May, while the median for all jobs was $42,600, the state Labor Department said. Securities, commodities and financial services sales agents' median income was $111,160. Gunderson and Achitsaikhan declined to say how much they earned in their previous positions.

Tending bar isn't recession-proof, said James Brown, a state Labor Department analyst.

Restaurants are facing the toughest environment since the 2001 terrorist attacks because of the slumping economy, record rents and an increase in food prices, Hunt said. Eateries may be more likely to hire an experienced bartender who is out of work because a restaurant closed than someone fresh out of training, he said. ``Eating establishments and drinking places tend to lose employment during downturns,'' Brown said. ``People spend less, tourism drops, expense accounts get cut.''

During this turbulent market where it is difficult to know what the news everyday is going to do to the market and how investors are going to react, we can all enjoy one thing and that's a lower cost to fill our gas tanks. I believe as of last night 6 states in the US registered gas prices under $2 a gallon.

Oil has come down dramatically in prices, and has risen a bit in the past couple days, but still oil sitting around $60 or $70 a barrel is much better then where it was. I read a report where an analyst thought that oil prices could get to $20 a barrel---a few months ago that was unthinkable. (I don't even know if it is currently "think able", but that's neither here nor there). It makes driving by a gas station, either to pump or just to look at the prices, to see the costs going down as opposed to going dramatically up each day. It got as high for one gallon of gas as a lunch in your work cafeteria in some places.

I am not sure what you as a consumer can do to help keep the prices where they are but I believe from what I did hear is you can help. Numerous sources have said to just don't get greedy with the gas, remember where it was before and don't have a short term memory. Know how quickly and dramatically gas prices can sky rocket. Use gas as you would have before when the prices were higher, sometimes you can control it of course, but if you we're car pooling to work, keep doing it, it'll only keep more money in your pocket.

Wednesday, October 29, 2008

Its a tough question to ask to certain people, there are certain people (most notably, Warren Buffett) who will live and die by the buy and hold philosophy of stock investing. They say historically the stocks perform better and when you trade frequently you water down your profits (or increase your losses) by trading expenses. As I've been reading, it seems as if the buy and hold philosophy would have returned you nothing over the last ten years, actually, you would have lost 11%. Ouch.

If you ever watch Jim Cramer and listen to him rant and rave about every stock under the sun, first you might think to yourself, "jesus, he talks to fast and churns through so many stocks in such a short period of time, how could I ever follow his advice?" and you also may think, "how can anyone with a full time job and a life (other than investing) keep up with him. So, for those reasons alone, you may think buy and hold is easier than trading frequently, but Jim Cramer will tell you different and he has had a very successful career as an investor, sans a few big hiccups he has had recently with his stock picks.

You may get a rush out of actively trading, and making a few bucks real quick, which is always a good feeling (hurts worse losing money real quick though). But you really need to access your goals, your time frame, your ability to handle risks (ups and downs, news, etc...) and the amount of free time you have to pick stocks and follow the active traders to see what they'll do before you can figure out what strategy is right for you.

Ill leave you with the thought that continues to occupy my mind as I think about these two strategies, and that is the number under Warren Buffetts name every year in Forbes or when you see him in the WSJ, the richest man, or very close to it.

Monday, October 27, 2008

Jeremy Grantham, chairman of Boston-based asset manager GMO, is feeling vindicated. In 1998, Grantham recalls, he forecast that in 10 years the total inflation-adjusted return of the Standard & Poor's 500-stock index would be -1.1%. In October, "it slashed through that, and marked the end of the Great Bubble," he says.

Now, Grantham, whose firm manages more than $120 billion in assets, is almost gleeful. The value manager, who earned the sobriquet "perma-bear" for his long-standing bearish outlook, is buying. Like Warren Buffett and a growing number of savvy value investors -- among them, Third Avenue Management's Marty Whitman and Longleaf Partners' Mason Hawkins -- Grantham is seeing opportunities in the cheap prices created by this autumn's rapid stock market unraveling. Stocks, Grantham says, are now cheaper than they've been since 1987. "You are looking at the best prices in 20 years, and you should be making 7% to 8% to 9% real (inflation-adjusted) returns. The last time I was this optimistic was in the summer of 1982."

Not that Grantham's blindly upbeat. "It's optimism with great trepidation," he says. That trepidation reflects the fact that Grantham doesn't know if the market will fall further. But he's not the type to try to time the bottom. In fact, he says, bubbles historically overcorrect, and usually quite dramatically. That's what happened after the stock market crash of 1929, the 1965 collapse of the Nifty Fifty, and the contraction in Japan in 1989. "We are reconciled to buying too soon," says the money manager. "A value manager buys too soon and sells too soon. That's the nature of the beast." Values at Home and Abroad Grantham, who is repositioning both his personal portfolio and his clients' funds, has "equal enthusiasm" for emerging markets stocks and high-quality U.S. blue chips.

Among U.S. stocks, Grantham's betting on big-cap blue chips -- the most solid of companies with strong franchises, little debt, and stable history. "I'm not personally recommending Coca-Cola, or J&J, or P&G but these are the essence of what I am talking about," says Grantham. "These super-high-quality franchise companies got left behind in what I call the 'greatest suckers' rally. They are cheap and have been cheaper than the market for a long time." Overseas, Grantham is looking at emerging markets, which are trading at around 25% off from what he considers their fair value, making them the cheapest prospects. Within emerging markets, he particularly likes Brazil. However, he's pessimistic on commodities, which he believes could be pushed to new two-year lows on slowing growth prospects in China and elsewhere.

What about financials, that most battered of battered sectors? Grantham's not as pessimistic on them as he's been previously, but he still prefers to invest elsewhere. "I don't think financials would make the list," he says, "but I think they are cheap relative to long-term expectations." With a stomach of steel and a keen sense of history, Grantham feels no qualms about buying now: "I don't have any anxiety. I feel so much better with history on my side. Truly. I've been looking forward to this for years."

The search for wisdom in personal finance will take you sooner or later to John Bogle, who founded Vanguard, created the first index mutual fund and still preaches the gospel of long-term, low-cost, diversified investing.Bogle, 79, has been warning for years about the excesses of Wall Street, where, he says, the triumph of "salesmanship" over financial "stewardship" produced colossal losses for millions of people. He is armed with statistics showing that a vast majority of investors - including most professional investment managers - should not even bother trying to pick individual stocks.

They are just not very good at it, he says. Better to invest in the broad market through index funds with low costs, allowing the shareholders, and not the investment managers, to profit when times are good.

As for trying to time the ups and downs of the market, Bogle contends that the chances of being right over any extended period are so negligible that it's a fool's errand to try.

Yet for simple, straightforward reasons, he says that this is a very good time to put money into stocks - not for short-term trades, mind you, but as part of a diversified portfolio that you hold for many years.

"The probabilities for stock market investing right now are very compelling," Bogle said by telephone from his office at the Bogle Financial Markets Research Center, on the Vanguard campus in Malvern, Pennsylvania. The cataclysm in world financial markets has brought down valuations to fairly attractive levels, he said, improving the prospects that the broad stock market, over the next decade, can earn an annualized return of perhaps 9 percent.

So this isn't the time to sell, he said, but he allows one big exception: "If you cannot afford to lose another penny, then you simply have no recourse but to get out of the stock market."Stocks could easily fall further, and if you aren't in a position to absorb more losses, you must protect yourself. And retirees should hold a big dollop of bonds, which generate income and provide ballast in a shaky market. "Investing isn't just about probabilities," he said. "It's about consequences, and you've got to be prepared for them."But for long-term investors who can afford to wait a decade or more before cashing out, the probabilities are much better right now than a year ago, precisely because of the terrible beating the market has taken.Of course, that doesn't mean you should put all of your holdings into stocks - "unless you're just starting out in investing and you're very young, and you have very little to lose, and an awful lot to gain," he said. Everyone needs to examine their particular situations and tailor an individual strategy. Nonetheless, he offered some rules of thumb that, he said, "will keep you out of trouble."

First, hold bonds - preferably in a truly diversified, low-cost index fund, and in an allocation roughly equal, in percentage terms, to your age. If you're 50, for example, consider holding 50 percent bonds and 50 percent stocks. "This is simplistic, and of course you need to look at your own situation," he said, and adjust the bond proportion up or down depending on your needs and level of risk-aversion.

If half of your portfolio was in the Vanguard Total Bond Market Index fund this year, that fixed-income portion would have held its own - on Thursday, it was down 0.2 percent for the year - and mitigated sharp losses in the equity part of your portfolio.

If the equity half was in the Vanguard Total Stock Market Index fund, your equity allocation would have lost 37.4 percent through Thursday. The net loss in your portfolio would have been just a bit more than half of that, or 18.8 percent. If you held more of the bond fund, your losses would have been lower.

Once you've set up a conservative, balanced, broadly diversified portfolio, as well as a way to add to it regularly, try to let it be. Don't check your returns daily.

Unless you're a market pro, and maybe even if you are, daily market averages are mainly noise, distractions without much meaning or use, he said.Bogle has lived with a transplanted heart since 1996, and while he has retired from management of Vanguard, he still works energetically, giving speeches and writing books about Wall Street's mistakes and the benefits of investing with a low-cost index fund approach.He says that despite "an orgy of speculation" that has hurt the global economy, he remains convinced that if long-term investors stick to the basics, "put blinders on" and try to have "strong stomachs," they can ride out the rough patches and ultimately prosper.

"If you were to put your money away and not look at it for many years, until you were ready for retirement," he said, "when you finally looked at it, you'd probably faint with amazement at how much money is in there."

Friday, October 24, 2008

Five reasons to buy Yahoo stock The struggling Internet company may look like a basket case but now's the time to jump in.

SAN FRANCISCO (Fortune) -- Here's why you should buy, not bail, on Yahoo.

1. Eventually, management will get tossed. Starting with the least scientific or analytical reason for owning Yahoo, there's every reason to believe the days are numbered for CEO Jerry Yang and President Susan Decker. By all accounts fine people, they simply haven't led Yahoo well.

The former excelled as Chief Yahoo, dabbling in deals and motivating the troops. But Yang hasn't been a decision leader and is "lurching from crisis to crisis," as The New York Times aptly phrased his tenure. Decker, in turn, is widely derided in Silicon Valley as too much the finance chief, not enough the operations guru.

Yahoo's doormat board tolerated Yang's ascension to CEO as a way of appearing to not have fired his predecessor, Terry Semel. Now that raider Carl Icahn - who has been quiet of late regarding Yahoo - is on the board, though, action is far more likely. Were the board to dump Yang and Decker it's an easy bet the stock would pop, even if they didn't immediately name a successor.

2. Microsoft will return. Microsoft continues to deny that it's interested in bidding again for Yahoo. It is forced to make these protestations because Steve Ballmer can't seem to stop talking about why such a deal would make sense.

The math is pretty straightforward here. Microsoft offered to buy Yahoo for $31 per share. Yang thought his company shouldn't fetch a dime less than $37. Microsoft said it was willing to pay $33. Today, Yahoo has been nosing below $12. Microsoft, instead, has been talking about buying back more stock. Just wait. Microsoft likely is waiting to see what the Justice Department has to say about Yahoo's search-advertising deal with Google. When that's all done, a Microsoft-Yahoo tie-up makes as much sense as ever, especially considering that Microsoft, amazingly, still can't make money in its online business. It needs Yahoo's scale to get profitable. There is another Microsoft option that could benefit Yahoo and its stock price. "We believe Microsoft is waiting in the wings to replace Google as a search outsourcing partner," writes Marianne Wolk of Susquehanna Financial Group, "which could afford Yahoo some upside lift to [its] earnings forecasts, assuming there is a minimum guarantee from Microsoft to exceed Yahoo's internal figures as incentive to get the deal done." That's a good thought: If Google can't help Yahoo make money, Microsoft will.

3. Investors are looking for reasons to buy this stock. In the initial hours after Yahoo reported a generally atrocious third quarter and a bleak outlook Tuesday, its stock popped. The various reasons postulated by observers were amusing when taken as a whole. The San Francisco Chronicle guessed this was due to "relief that Yahoo's fourth-quarter financial guidance wasn't as bad as feared." Others chalked it up to the cost reductions associated with announced layoffs of 10% of Yahoo's workforce - even though the layoffs were widely expected and therefore shouldn't have affected the stock price. One analyst, Mark Mahaney of Citigroup, praised Yahoo for having had the foresight to avoid stock buybacks until now - and then prognosticated the positive impact of future buybacks. "We note that the company ended [the third quarter] with about $3.3 billion in cash and no debt," he wrote, adding that buybacks were likely.

4. Long-term trends favor Yahoo. Yes, Yahoo is losing share to Google. Yes, Yahoo is barely growing. Yes, it's a tired argument that Yahoo is one of the strongest brands in the media world. Yes, this argument for owning its stock hasn't worked in a long time. Yet the argument still holds water. The company global page views grew 17% in the third quarter. It's part of an industry, online advertising, that will continue to grow (or at least take share) no matter the economy. Compared with The New York Times, a sterling brand in a declining industry, Yahoo is a powerful brand in a growing industry.

5. It's cheap. There's always that. Morgan Stanley's Mary Meeker figures that given the value of Yahoo's cash and its publicly traded Asian assets (even taking into account the difficulty in selling stakes in other companies), investors value Yahoo's core business at just $6 per share, or eight times Wall Street's estimates of 2009 profits. That's an extraordinarily low multiple for any company with the opportunities in front of it that Yahoo has. Yahoo's management thought Yahoo was cheap at $30, of course. Today, investors would do quite nicely for a fraction of that amount...

Thursday, October 23, 2008

I am no stock picker and I do not claim to be. But it seems as if Amazon.com, Inc (AMZN) has gotten banged up pretty good over the past year or so. As of right now it is selling closer to its 52 week low than its 52 week high, and they are not forecasting great results forthcoming. That makes no sense to me. I would think that as we approach, or are already in a recession people would become much more aware of where their dollars are going. Me personally, if I want a book, I am going to order it from Amazon.com (and I would have even before this recession), because I can get it much cheaper all I have to do is wait a few days for it to ship. Not that Barnes and Noble or Borders are rip offs, but if you have just a little patience you can save yourself like 50% of your order cost. This is just books that I am talking about too, how about all of the other items you can buy online that you can get at huge discounts from the brick and mortar stores.

Also, we have this new population of people, people that have grown up from their very young childhoods using computers, so they may be more comfortable placing an order online then some of the older folk, who just started using computers and are not yet as comfortable. As this generation of computer savvy people starts taking up more and more of the population, I feel as if more and more things will be purchased at quite a discount online. I have not actually read the Amazon.com business model, but I am going to assume they take a piece of every sale on the site, otherwise it wouldn't make sense for them to sell items on the site. All of this information is pointing to more money in Amazon;s pockets and more traffic to the website, therefore more people talking about their experiences on Amazon, then leading to NEW customers to Amazon.com. In summation, I feel that Amazon.com, Inc (AMZN) is worthy of people taking a look at it and maybe picking up a few shares somewhere down the line. Not only did I just discuss how more people are going to be shopping on there, but come on, again - we are in a recession, everyone is going to be looking for a cheaper deal on things, and that's online.

Think about it. Like I said, I'm not expert, but I think it might be something if you were to buy and hold for a very long time, you would be a happy investor.

Sanford Weill, the architect of Citigroup Inc., is considering a plan to profit from the same turmoil that has clobbered the banking giant.

Mr. Weill, who pulled off the deal that created Citigroup a decade ago and became its chairman and chief executive, is in talks about launching a private-equity fund that would invest in beaten-down financial companies and assets, according to people familiar with the matter.

Mr. Weill's potential partners are Michael Klein, who was co-head of Citigroup's investment bank until he left in July, and Michael Masin, former chief operating officer at the New York company.Such ventures often fizzle before getting off the ground, so it isn't clear if Mr. Weill will go through with the plan. In recent weeks, though, Mr. Weill's team has reached out to potential investors, including sovereign-wealth funds, outlining their strategy and gauging interest in putting money into such a fund, people familiar with the discussions said. The tentative goal is to raise about $5 billion.

Launching the fund would mark a new chapter in Mr. Weill's storied financial career. In 1986, he bought a troubled Baltimore-based lender that became a vehicle for building a global financial juggernaut that culminated in Citigroup. Now 75 years old, Mr. Weill stepped down as CEO in 2003 and as chairman in 2006.

In recent years, Mr. Weill has devoted much of his time to two philanthropic ventures, Carnegie Hall and the Weill Cornell Medical College.

Meanwhile, Citigroup has suffered, piling up four straight quarterly losses that have caused its shares to plunge 55% since the beginning of the year.In 2005, Mr. Weill was preparing to launch a private-equity fund but shelved the idea following an outcry from Citigroup's board, which worried that the venture might compete against the company.

Mr. Weill has remained obsessed with Citigroup, frequently offering his advice to bank executives. Last year, after handpicked successor Charles Prince resigned under pressure, Mr. Weill volunteered to return to the company. Citigroup directors declined his offer.Earlier this year, he joined sovereign-wealth funds, public pension funds and other investors who pumped $12.5 billion into Citigroup in exchange for preferred stock. At the time, Citigroup's stock was trading at about $28 a share.The shares fell 6.1%, or 86 cents, to $13.32 apiece in New York Stock Exchange composite trading Wednesday at 4 p.m.

Mr. Klein is a charismatic investment banker with a bulging Rolodex. Since leaving Citigroup, he has advised the U.K. government on handling the financial crisis and recently landed a fellowship at Princeton University's Woodrow Wilson School of Public & International Affairs.

Mr. Masin got to know Mr. Weill during their time together as trustees at Carnegie Hall. Mr. Weill recruited him to join Citigroup's board and later hired him as chief operating officer. Mr. Masin left Citigroup in 2004 and is now a senior partner at law firm O'Melveny & Myers LLP.

Messrs. Weill, Klein and Masin either declined to comment or didn't respond to requests.

Wednesday, October 22, 2008

I get a fair amount of mail about the economy. Lately, much of it asks the same questions:* What the heck happened to our economy so suddenly and powerfully that it caused the immense uproar and fear and stock market crashes we have had lately?* Why didn't I, Ben Stein, famous so-called braino, get what was happening and why did I remain optimistic so long?* What is the future going to bring?

First of all, obviously, I don't know what the future will bring. If I knew the future, I would be the richest man on the planet very soon and I assure you I am very far from that.

But I now see what has happened and I can explain that, and it might give a tiny bit of insight into what will happen in the future.

Start around 1995. Groups involved with civil rights issues and activities for poor people began to complain that poor people and especially non-white poor people got mortgages much less often than white well to do people. Many economists, including me, explained that it was not at all surprising that poorer, less credit worthy people were often turned down for credit. That's how credit is supposed to work: you lend to people who will pay you back.

But the advocates for poor and black people had immense political clout. Under President Bill Clinton, they passed legislation that called on banks to be required to lend to non credit worthy borrowers. The laws, including the Community Reinvestment Act, the CRA, required two large government sponsored enterprises, Fannie Mae and Freddie Mac, to buy those lower quality mortgages from the banks, guarantee them, and sell them to the public. These were bundled into immense pools of subprime mortgages as they were called, and sold all over the world.

Soon, the private sector got into the act in a vast way. They also went to banks and bought their subprime loans, packaged them, and sold them as Collateralized Mortgage Obligations all over the world.

Supposedly, the subprime collateralized mortgage obligations (CMOs) were sliced up in such a way that buyers could have a very high likelihood that they would be repaid even if many of the mortgages in the portfolio defaulted. This assumption was based on a misunderstanding of poor quality credit that had been popularized during the era of the junk bond investment powerhouse, Drexel Burnham Lambert.

As it happened, these low quality mortgage bonds were recognized as highly likely to have real problems very soon after they started to be issued by private banks in the billions. The people who recognized the high likelihood of defaults were able to profit from that likelihood:

First, they could sell the mortgage securities short, a straightforward wager that has long been available.

Second, they could buy credit default swaps (CDS) from financial entities. These were essentially a side bet that anyone could make about a certain mortgage bond (or any other kind of security). It paid off fantastically if the bond went into default or was close to default. The people who sold these CDS were banks and insurers, especially Merrill Lynch and A.I.G., that believed the mortgage bonds would not default and therefore charged very little to the other side, the counterparty, to make the bet.

Things went along well for everyone on the long side for several years as the housing market boomed. Even if borrowers could not repay their mortgages, they could refinance the mortgages for more money than was owed on the original mortgage, pay off the first mortgage and live happily in their new home. The mortgage in question in the bond would - again-- be paid off and the bond would continue happily in its owners hands.Then, the housing market started to stabilize and soon fall, as housing prices do. They move in cycles, although around a rising mean, as we economists say.

Now, when the subprime mortgage holder could not pay off his mortgage, he could not refinance. Instead, he had to default. When a lot of these mortgages defaulted, the bonds into which they had been lumped declined in value.

So far, I, your humble servant, followed the deal just fine. It was extremely similar to the collapse of the Drexel Burnham Lambert junk bond empire. This had caused barely a ripple in the national economy when it fell apart in the early 1990's. I assumed that the same would happen with junk mortgages. There would be some failed banks and insurers, but the Federal Reserve, the Federal Deposit Insurance Corporation, and the Treasury could make all of those losses good. The total amount of subprime mortgage bonds was large but not compared with bank capital or the regenerative powers of the Fed.

So, I assumed, and wrote, things would be fine.

Where I missed the boat was not realizing how large were the CDS based on the junk mortgage bonds. They were not only large, but absolutely staggeringly large. Where the junk mortgage bonds were in the hundreds of billions, the CDS were in the tens of TRILLIONS. If the sellers of the CDS had to pay off in large part, the liability greatly exceeded the total bank capital in the United States and maybe in the world. That is, the derivatives based upon the junk mortgage bonds could be - and were - not in any way limited to the size of the mortgage bonds themselves, and this I did not know until a few months ago.

It is this liability that swamped the banks, investment banks, and insurers. It is the CDS liability that broke AIG and Lehman.

When I realized the extent of this problem, I wrongly thought the federal government would step in and in some way rescue everyone who had sold CDS. They did, except they 'forgot' to rescue Lehman. Lehman was so large that when it failed, it was like a torpedo striking an ocean liner below the water line. A gaping hole was left in the whole world finance system.

Bankers panicked. If Lehman could fail, then anyone could fail. In that case, the banks that were still solvent figured they had better hoard their assets and stop making loans. This led to the ongoing credit freeze. This led to a rapidly gathering economic downturn and a drastic fall in prices of all kinds of securities, real estate and commodities. It also led to a severe credit squeeze on hedge funds, which saw credit dry up and their asset prices fall suddenly, and were forced to sell stocks and other assets on a dramatic scale, leading to still greater falls in securities prices, and the worldwide panic that it still unfolding.

In turn, this led to huge infusions of liquidity into the banks of the world, the semi-nationalization of the banks of the United States and of many other nations to shore them up, thaw credit, and bolster world markets and economies. These were drastic steps for drastic times, all generated by derivatives. Warren Buffett had warned us against them, and he was dead right, as always.

Now, these acts should help. But it might not do the job all by itself. Major lender solvency issues remain. If housing prices keep falling, more mortgage bonds will default and the liability attached to the credit default swaps based upon them will still be in the trillions or even tens of trillions.I might well be too alarmist here, but I think the only rational possibility is for the federal government or the New York State government (because most of the CDS were entered into in New York) to simply annul the credit default swaps as void as being against public policy. After all, there was no insurable interest in most cases, which tends to void insurance contracts, which is what a CDS is.

Once that happens, the banks can breathe freely again, take risks, and the economy can revive. Or, perhaps the housing market will stabilize, mortgage based bonds will rally, and the CDS will be out of the money and will not be a threat to the lenders. But something has got to happen to defuse these deadly derivatives.

In any event, we now know a lot we did not know before. Credit default swaps are way too dangerous. Derivatives generally are dangerous. There is much that Ben Stein does not know. I hope this explains some of how we got to this precarious place, I apologize for not seeing it sooner. But I am still optimistic that the government will save us from the CDS, and we will go on to renewed prosperity. In other words, I am still buying.

Tuesday, October 21, 2008

Next time you get some time on your hands and your sitting around watching TV or you're bored out of your mind doing nothing, you can take a few minutes and save yourself a few bucks. You'll also have a great feeling of satisfaction after because you did something to help yourself!

1) Cell Phone - Call up your current cell phone service provider and let them know that you have been shopping around for better deals and you have found one. Let them know that you have run a break even analysis and even with the large fee that you may be charged for cancelling your contract with them, over the next few years you will be saving a lot more money. Now, don't get pissed off and start yelling because you really should have no intention on cancelling with them. Tell them, you've liked the service you have received from them for however long you have been with them, and if they could help you out somewhere along the way (more minutes of you need them, free texting, shave a few bucks off each months bill) you would be more than happy to stay with them. This should be good for a small break in the monthly service fees or some free minutes and texting.

2) Car Insurance - I did this just the other day, it only took a few minutes and the person with Geico was actually pretty helpful. I called and told them I was looking to shave some costs off my car insurance monthly bill but I also wanted to make sure I was well insured still. We went through my entire policy and we were able to make sure I was still very well insured and I took a few dollars off each months bill. ALSO, with car insurances, you can save money based on how you pay you bill. If you pay lump sum every 6 months you won't be hit with any fees, but sometimes if you pay monthly they charge a convenience fee, which can add up to be like $50 a year, so see if you can work something out with the insurance company. You could also pay the insurance for a year or 6 months on a 0% apr credit card, that way as long as you pay it on time monthly you wouldn't be hit with any fees.

3) Credit Cards - This can be helpful if you have a card with a balance on it or if you just have a credit card for emergencies. Call up your credit card company and let them know that you have been shipping around for credit cards with better rates and you have found one. You can make up a card company (chase, citi, amex, whatever) and say they are offering a rate lower than what you are currently getting with your current card. Again, like the cell phone, you don't need to yell at them because its very possible you have no ambition to switch credit cards. Just let them know there are better rates out there, reiterate you haven't had problems with the current card, or if you did they weren't huge ones and you are just looking out for your best interest. If you do carry a balance that can safe you a ton of money a year, and if you don't, when you have an emergency and have to use your card it won't be quite as painful.

4) Reconciliation - Go through all of bank statements and credit card statements and look at all of the charges. Make sure you know what every charge is and you need every charge. Make sure you don't have a small fee getting charged every month from your credit report, or if you don't listen to satellite radio, call and cancel it, this can save you $30 or more each month (if you cancelled your credit report and satellite radio). There are other ways out there to get a credit report for free, you don't need to pay $15 a month.

Follow these steps and be that much closer to positive cash flows at the end of every month.

Monday, October 20, 2008

So as Ive said before, I think there could be some good opportunities out there in the stock market to buy at some historically low prices. But who am I to say, a twenty-something year old investor and stock researcher, but I haven't LIVED through the ups and downs like some of the following guys have.

Buffett says hes is buying US stocks based on his simple philosophy: be fearful when others are greedy and greedy when others are fearful.

John Nuff, who was in charge of the Windsor Fund at Vangaurd for a few decades says that it is time to start buying again.

Buffett talking to Reuters:

(Reuters) - Billionaire investor Warren Buffett is buying U.S. stocks, he wrote in an opinion column in the New York Times.

"A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful," Buffett wrote in the paper.

Buffett acknowledged the economic news was bad, with the financial world in a mess, unemployment rising and business activity faltering.

"What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up," he said. "So if you wait for the robins, spring will be over."

Buffett, who made his money by building his company Berkshire Hathaway Inc, into a $199 billion conglomerate, wrote that investors were right to be wary of highly leveraged entities or businesses in weak competitive positions.

"But fears regarding the long-term prosperity of the nation's many sound companies make no sense," he said.

Buffett said major companies would suffer earnings hiccups, but added they "will be setting new profit records five, 10 and 20 years from now."

Neff talking about his outlook:

In a small office in West Conshohocken, a legendary stock market bottom feeder has been having a feast.

John B. Neff, who racked up record gains as manager of Vanguard's Windsor Fund over three decades, is buying stocks again.

And while the actions of one person may mean little in a multitrillion-dollar market, Neff's renewed romance with stocks signals that, to him, the worst is over.As of Friday, he has put cash that he had held on the sidelines for the last year back into the stock market. He retired from Windsor in 1995, after 31 years, so the world no longer watches him. He manages a portfolio for himself and for some small charities.

But at age 77, he has not tired of what he calls "the ultimate ball game," the stock market.About 18 months ago, Neff started to keep more of the stock portion of his portfolio in cash. (He noted that since he left Windsor, he has kept about 30 percent of his portfolio in tax-free municipal funds to preserve wealth.)

Neff likes bargains, stocks that sell for prices of five or six times their earnings. It is like shopping only when prices are marked down 60 percent or more.

Few stocks were that cheap last year, so he sold some of his investments to take gains and did not reinvest. For much of the last year, he has had about 15 percent to 20 percent of his stock portfolio in cash.

It is not that he saw the downturn coming.

"I wasn't greatly concerned about the level of the market, or I would have had more than 15 percent in cash," he said. "I was just having a tough time finding the kind of stuff I like, with a low P/E [price-to-earnings] ratio and a high dividend yield."

Like a P/E, a dividend yield, calculated by dividing dividends paid yearly by the stock price, may indicate whether a stock is a bargain.

So does it mean anything that he has put his cash back in the game?

"It does," he said. "It says in fact that an awful lot of things are available at a friendly price. It's the kind of market I'd take advantage of."

He is not completely bullish.

"There's some real tough sledding out there," he said. He said he believed that the economy might experience a recession but that he thought it would be mild because retailers were marking down prices and consumers would buy.

And before anyone even considers following his investing lead, he cautions that he "really got killed the last couple of weeks."

Last year, his portfolio lost about 11 percent, although the overall market was up slightly. But since he left Windsor, he said, he has earned about 19 percent yearly, far better than the overall market. In the 31 years he oversaw Windsor, he beat the Standard & Poor's 500 index 22 times - by about 3.5 percentage points a year.

As Windsor manager, he was a maverick. (Neff, a lifelong Republican, is supporting John McCain for president.) Conventional investing wisdom says people should diversify, buying many stocks to reduce the risk of losing a lot on one. Neff liked to make big bets - and still does.

His current portfolio contains about seven stocks. His on-again, off-again love affair with banking giant Citigroup Inc. is on again. He famously bought a big stake in that company for Windsor in the early 1990s when bad loans in real estate and in developing countries pummeled its shares.He has been buying Citigroup again, believing that its stellar network of offices around the world will help it thrive when the global economy recovers. Citigroup now accounts for about 13 percent of his portfolio.

He also likes Seagate Technology Inc., which makes hard-disk drives. Neff said he thought that business would continue to grow as corporations sought computer storage.

Several of his positions remain underwater, but he has regained some of that ground in the last two days.

"Citigroup is up 18 percent today," he said after yesterday's market close. He still has a long way to go. Citigroup shares closed at $18.62 yesterday. He paid about $45 a share for previous Citigroup purchases.

So he continues to toil, almost as hard as he did when he was managing billions of other people's money. He works about 60 hours a week in the West Conshohocken office offered to him by his friend Paul Miller, a founder of the money management firm Miller, Anderson & Sherrerd that later became part of Morgan Stanley.

Neff said he remained a product of his youth in the Midwest and in Texas.

"I'm a combination of Michigan substance and Texas bull," he said. By bull, he said, he means that he has strong opinions and few fears about expressing them.

His opinions remain strong, but his body has faltered a bit. He has retired from various boards of directors. He tires more easily than he used to and dislikes the harried nature of today's business travel. He says he is occasionally forgetful and confesses to requiring a short midafternoon nap."It's just a little hard to keep up. I still keep up with the marketplace, I think."

Friday, October 17, 2008

Are stocks cheap yet? It's been a brutal selloff, and blue chips have been burned. By some measures, it's a good time to buy.

NEW YORK (Fortune) -- Has the brutal market selloff left stocks in the bargain bin? After three painful weeks on Wall Street - and another 9% plunge in the S&P 500 Wednesday, the steepest one-day selloff since 1987 - the stock market is hovering around five-year lows. Including Wednesday's drop, the S&P 500 is off 38% since the start of this year, while the Dow Jones Industrial Average has plummeted 35%.

So are stocks downright cheap yet? By many measures, they certainly appear that way. Analysts at research firm Morningstar calculate a "fair value" for each of the approximately 2000 stocks they track. On average, those stocks now trade at about 72% of that fair value estimate, after hitting a low of 64% on October 10. That's as low as the figure has gone since Morningstar began tracking it in 2001. The research firm has more five-star-rated stocks now than ever before, says Robert Johnson, Morningstar's associate director of economic analysis.

Financial stocks have made most of the headlines, but other blue chips have been burned too. Exxon Mobil,for example, now trades at $62, down from a 52-week high above $96. General Electric has seen its share value halved, from more than $41 to $19 and change. Microsoft closed at $22.66 Wednesday, off a 52-week peak of $37.50.

The broad stock market now trades at 11 times the past 12 months' operating earnings, says Sam Stovall, chief investment strategist at Standard & Poor's Equity Research. That's a 44% discount to the average multiple since 1988, Stovall notes. "If you expect no earnings growth at all, we're still trading at a very hefty earnings discount," he says.

Another measure of valuations also suggests that stocks are extraordinarily cheap right now. By using a ratio of price-to-peak earnings (essentially, the highest earnings posted during the current economic cycle), money manager John Hussman and others seek to more accurately forecast market conditions by filtering out some of the noise and volatility inherent to quarterly earnings.

As Hussman pointed out in a recent note to investors, the S&P 500 is trading for about 10.7 times its peak earnings levels, a multiple as low as we've seen in nearly two decades. (The bear markets of the early 1970s and 1980s saw price-to-peak earnings multiples around seven, but the price to peak earnings multiple historically averages around 14.) "Stocks are now at the same valuations that existed at the 1990 bear market low," Hussman wrote. "Relative to 30-year Treasury yields, the S&P 500 is priced to deliver the highest excess return since the early 1980's."

That hasn't been enough to lure hordes of bargain hunters back just yet, and investor psychology may be largely to blame. The market tumble may have been the result of the frightening uncertainty over the full scope of the credit crisis and the federal bailout plan. But a related concern is now also preoccupying many investors: Just how long and deep will the recession be, and how much will corporate earnings suffer? "Everybody's now suddenly waking up," says Morningstar's Johnson - and dealing with the notion that, "Oh shoot, we've got a recession to go through yet." That's why Wednesday's troubling retail-spending report prompted such a sharp decline.

The lingering economic uncertainty and the cloudy picture for earnings make it extremely difficult for investors large and small to gauge just how cheap stocks have become. The worry now is that, if the economic crisis drags on and earnings expectations for the fourth quarter and the year ahead prove too optimistic, today's screaming bargains may not be such great deals after all.

Thursday, October 16, 2008

The stock market can be very risky as we have seen over the past few months. There were tons of people who lots tons of money due to the market collapse, I mean I'm talking 40-50% of their retirement nest egg. A good amount of our US population is baby boomers, and they are all getting ready to retire within the next few years. Those people are some of the people who have been hit the hardest, they may have to put retirement off for years and continue to work (if they can keep their jobs). I only say that regarding keeping their jobs because of the fact we are in a "recession", and during recessions there tends to be lay offs, so hopefully none of those people will get laid off...well hopefully there wont be any lay offs, hopefully as a whole the economy turns around quickly.

So as I just stated, this is a tough time for anybody in the market, but it can be good for us young people. Think about it, the stock market is selling at levels that it was at 7 years ago...if you can get some money into the market now (mutual funds, index funds, or individual stocks - if you know what you are doing) its kind of like having started years earlier. I heard a person say the other day "we are all going to be kicking ourselves in 24 months because we did not take mortgages out on our homes and put it into the market" - that's if we could even get loans now because there has been a loan freeze recently and its been very difficult to get loans. What he was saying was that he was optimistic about the market over the next few years. Now that was not Warren Buffett who told me that, but it makes sense that the stocks will rebound. Buy low sell high, that's the first rule of investing in stocks and now could be a great opportunity to buy low.

Below are a few links to articles about legendary investors discussing how there are some GREAT values out there in the market right now.

Going against the theme above, there are other ways that you can look at this economic catastrophe. The US savings rate is somewhere in the area of -2%...yes that's a negative, the US as a whole spends more than they make. You can have this current turmoil be a reality check for you, for years the economy was good, the market was great and we did not even think of anything like this happening, so we may not have thought about building up a nice emergency fund in cash sitting in a high yield savings account building for us. That is something everyone needs to have, you need to be prepared for the worst, you need to be prepared for job loss or your extra income being cut. So you can either be optimistic on the market and put some money into the stocks and hoping that is turns around and you get a nice amount of money WORKING FOR YOU in the stock market, or you can build up a nice cash hoard for any hardship you may come across.

If you want to open a brokerage account and start investing, I'd recommend Scottrate, Charles Schwab or even Sharebuilder. These companies all have low commissions on your trade so you can make more of your money work for you as opposed to going to expenses of making a trade.

If you want to build up a CASH HOARD (I like the sound of that, it sounds cool, the word HOARD) I would recommend setting up an ING Direct savings account or E*Trade. ING Direct does not have the highest rate out there right now but they do offer $25 bonuses for opening an account (which I can hook you up with, just send me an e-mail) and honestly, they could not be easier, I have used ING for the past 4 years and I have never had an issue and the site is so easy. E*Trade pays a bit more in interest, and I don't have much experience with them, but I do have an account with them and they are pretty good too.

Let me know if you want a bonus link, or want information on opening a brokerage account.

I'm going to try to do a series of short bio's on successful people we see and hear of daily, and whom we probably idoloize. Not everyone comes from money and I am sure we can get good insight from a few rags to riches stories...let me know if you know of anyone that came from little and turned their lives into a success story.

Yet it doesn't have to be twilight either. America can pull through the current economic crisis with a dose of political maturity and a bit of luck. Success will mean the end of the Reagan era, of an ideology that has brought the country to its knees.

Ronald Reagan told us that government was the problem, and that low taxes and deregulation were the solutions. The result, even more than Americans recognize, is a government so shrunken in skill and mandate that our gravest problems - financial collapse, natural hazards like Hurricane Katrina, broken health care and education, unsustainable energy systems, and growing global instability - are left without a serious response.

Either we once again invest in our future, notably through an expanded public sector, or we will lose our future.

I presume that John McCain and Sarah Palin will lose the election. Never has a national ticket been less equipped intellectually, temperamentally, and practically to confront America's problems than this one. I also presume that Palin's winks to America will prove to be the equivalent of the Cheshire Cat's grin: the last expressions of an ideology disappearing from the scene.

Yet Barack Obama will soon find himself and our country in a labyrinth of difficulties requiring a new approach to public policy. The Reagan-era small-government ideology is defunct, and so too is the modest corrective that characterized Bill Clinton's "triangulation" with the right.

In the immediate future the greatest challenge is to stop what George Soros has called the "wrecking ball" of unregulated finance, the consequence of turning the economy's keys over to Wall Street.

Vast sums of money, untethered from the traditional capital-adequacy standards of commercial banks, inflated a gargantuan housing bubble that has now burst. The outflow has been violent in the other direction, as short-term funds from pensions, money markets, and foreign lenders have suddenly fled to safe havens. The housing market and consumer credit are in collapse. Wall Street's shadow banks have closed down. Money market funds are so spooked after Lehman's bankruptcy that they won't buy AAA commercial paper.

When AAA isn't good enough, we know that panic and fear have taken over.

The immediate need is to save the financial system through ample liquidity from the Federal Reserve, government backing of the commercial-paper market, and banking sector recapitalization, mainly by private money but also from public funds as needed.

Giving homeowners relief from foreclosures will be an important social policy and a way to return mortgage-backed securities to a partial-repayment basis. Unfortunately, the Paulson-Bernanke $700 billion bailout, aimed at buying mortgage-backed securities from the banks, addresses none of these issues, as the world's financial markets realized the moment the legislation was passed. The new President will have to modify the plan starting on Jan. 20 so that the vast sums voted by Congress will contribute more directly to banking recapitalization and the timely restructuring of existing mortgages.

Stopping the wrecking ball with these measures will take a while, probably at least through 2010 or 2011. These steps will prevent an economic collapse similar to the Great Depression or even to that of Asia in 1997, when several economies shrank by 10% or more.

By keeping credit markets open for business, the government can prevent an outright collapse, a depression, but that will not stop a recession in the U.S., centered on a steep fall in housing construction and consumer spending. The U.S. economy is likely to shrink by a few percent of GDP in 2009, and unemployment is likely to rise by a few percentage points. All of this will hurt badly.

Yet the greater challenge is not simply to stop a collapse, and certainly not to resurrect the housing bubble, an impossible and misguided goal that is still widely espoused through one scheme or another to get mortgages flowing again.

The deeper problems come back to Reaganomics. By next year we will find not only a shuttered housing market and weakened banking system but also a budget deficit exceeding $500 billion and perhaps as high as $750 billion or more, including charges for the financial bailout. The larger figure would amount to 5% of GDP, the highest proportion since the Reagan years. America will have gone through a decade of minimal household saving (made possible, of course, by the defunct easy access to mortgage financing and consumer credit) and will have borrowed, cumulatively, around $4 trillion from abroad since 1998, mainly from Asia. And we haven't even begun to address the challenges of climate change, broken infrastructure, health care, and schools.

For these reasons, we need to begin the transition back to national saving, both by government and by households. Now that easy financing has dried up, consumer spending will weaken dramatically, aggravating the pain in the short run.

For households, this can and should be the transition to positive saving and rebuilding net financial assets. Housing construction will remain low for several years, as will purchases of consumer durables like automobiles and home furnishings. The dollar should weaken, which will direct some of the resulting excess productive capacity toward exports, thereby reducing and eventually eliminating our heavy dependency on foreign saving. As a rich country, the U.S. should be a capital lender to the world, not a net borrower.

Some of the excess capacity, however, should be filled not by exports but by increased public and private investment at home. America needs an upgraded infrastructure to stay safe and secure. Yet we've neglected infrastructure for decades. Federal investment in nonmilitary major physical capital has been running a meager 0.2% to 0.3% of GDP in recent years. The results of chronic underinvestment are degraded roads and bridges (ones that actually go somewhere), lagging broadband access in parts of the country, vulnerability to natural hazards, and a dangerously decrepit power grid that is susceptible to disruptions and unequipped to support a modernized energy system.

In fact, the entire U.S. energy system needs an overhaul, both to ensure energy access and national security and to begin the transition to a low-carbon-emission economy to curb rapidly accelerating climate change. Such a massive multitrillion-dollar overhaul will inherently require partnerships between the public and private sectors, the kind of relationship deliberately shunned by the free-market reveries of Reaganomics. The goals of the partnerships should include:

*The development of mass-market battery-powered autos (hybrid or plug-in) that achieve at least 100 mpg of gasoline on new fleets by the year 2015. *An efficient power grid that can carry renewable energy - solar from the Mojave Desert and wind from the Great Plains - to the population centers of the U.S. *A utility industry that can reduce 80% of emissions per kilowatt on newly built power plants by 2016, either by recruiting noncarbon sources (wind, solar, nuclear) or by capturing and disposing of the carbon dioxide. *These goals will require hundreds of billions of dollars of public financing for research, development, early demonstration, and the rollout of new technologies, which in turn will leverage trillions of dollars of private capital during the next 20 years.

Now here's the rub, the one that has not even begun to sink in. None of this can be accomplished with the fiscal straitjacket that has been in place since Reagan's first tax cuts in the early 1980s. The mantra of small government and money in the pockets of ordinary Americans has been with us for nearly 30 years now, right through the Clinton era as well. Budgetary revenues have been capped at around 18% of GDP even as the population has aged, health-care costs have soared, and needs from energy to education have been left unattended.

Reaganomics began with wrong diagnosis and a great lie. (In these waning days it depends on even more absurd justifications.) The wrong diagnosis was the belief that the stagflation in the 1970s was caused by too much government, when in fact it was caused by the breakdown of the global fixed-exchange-rate system in the early '70s and by a dramatic tightening of global oil supplies, which led to OPEC's market power. Stagflation was eventually overcome, at high cost, by the combination of Paul Volcker's tight-money policy, investment in energy efficiency, and the development of alternative energy supplies - not by Reagan-era tax cuts. The great lie was to blame the stagflation era's spiraling costs on the infamous "welfare queens" allegedly taking the hard-earned money of America's workers.

This narrative played into the fantasies of a free-market, go-it-alone America, and for some it still does. The absurdities today are that the budget deficit, now at $450 billion and rising, is somehow to be eliminated, according to McCain and Palin, by boldly cutting $18 billion in earmarks and other unidentified waste, fraud, and abuse. That won't get us very far. Such small-government platitudes are especially discordant at a moment when the government is plowing in $700 billion to bail out the financial system.

The true fiscal story is far more dramatic and interesting than the Reaganomics daydreams. Government outlays amount to roughly 21% of GDP, but nearly 17% of GDP is accounted for by a very few areas: the military (4.2% of GDP), health and veterans' affairs (5.4%), retirement and disability, including Social Security (5.4%), and net interest payments (1.7%). Four percent of GDP must now finance all of the following areas: infrastructure, education, housing, nutrition, antipoverty, energy, environment, international affairs, science and technology (including space), agriculture, judiciary, and general administration of government! Of course, this is absurd. It is the end stage of a failed ideology that says that these areas should be left to the private sector. In fact, everyone is awaiting serious government as a partner for business and society.

We can't even fund our current minimalist government out of current taxes, and yet we will have to expand government spending by several percent of GDP to face our cascading problems. Today's budget deficit of 3% of GDP will expand to around 5%, but on top of that will be another 3% or so for all the critical needs we will face. From the perspective of five to ten years, even an additional 3% may be too low in view of the vast unfunded liabilities represented by rising costs of health care for an aging society. The idea that our fiscal mess can be addressed with the current tax system is absurd. The McCain-Palin idea of adding still more tax cuts for the rich on top of everything is surreal.

Some fiscal steps are clear. Around 2% of GDP can be recouped by ending the Iraq occupation (costing roughly $140 billion per year in direct outlays) and by cutting some expensive, unnecessary weapons systems. Another 1% of GDP can be recouped by ending the Bush tax cuts for the wealthy, as Obama has suggested. Yet even those steps will leave us with vast and growing needs. We should probably be aiming realistically for outlays and revenues close to 24% of GDP (up by three percentage points in outlays and six percentage points in revenues), compared with the current federal outlays of 21% of GDP.

Where will this money come from? The income tax is pretty much exhausted as an effective source, except to recoup a bit more at the high end, and corporate income taxes are of limited potential in a global world economy where they can be so easily avoided. One good but partial option will be carbon taxation, which might realistically collect 1% of GDP (roughly $25 per ton on six billion tons of emission). The fiscal gap will remain.

Like every other high-income country, the U.S. will finally need a national value-added tax or sales tax of some sort, perhaps starting at a 5% rate (to collect initially around 3% to 5% of GDP). The VAT has proved to be a smart tax, by focusing taxation on consumption rather than on saving and investment. Admittedly, we are nowhere near a public consensus on such issues. Nobody has even bruited such a possibility. Both candidates are promising tax cuts: Obama moderately for the middle class, and McCain recklessly for the rich and for corporations as well.

Yet reality will begin to dawn. Reaganomics is over - even the moderate, triangulating version of the Clinton years. It's time to embrace government again as part of the solution rather than as the source of the problem. And it's time to start paying for government again. Our future, and surely our children's, will depend on it.

Tuesday, October 14, 2008

NEW YORK - Amid weeks of stock market turmoil, many worried investors have been tracking the daily trajectory of the Dow Jones industrial average like never before. But few understand how the index of 30 of the biggest U. S. companies is calculated - or what the closely watched measure of stock market performance really means. Here are some questions and answers about the world's most famous stock index.

Q: What is the Dow Jones industrial average?

A: The Dow, the oldest continuing U. S. market index, is a way of measuring the combined stock values of 30 big U. S. companies. It started out with 12 components, including now-defunct companies like U. S. Leather Co. and Tennessee Coal, Iron and Railroad Co. The only original component still around is General Electric Co. These days, the index has expanded to reflect the U. S. economy's move away from big industrial companies. Staples of the modern Dow include big financial companies like Citigroup Inc., technology bellwether IBM Corp. and drug manufacturer Pfizer Inc.

Q: How is it calculated? A: Charles Dow, who launched the index in 1896, originally just took the price of one share of each company's stock, added the numbers up and divided by the number of companies. The average when the index launched was 40.94 - a quaint little number compared to Monday's close of 9,387.61, or the Dow's record high of 14,165.43 on Oct. 9, 2007. Today, Dow Jones & Co. has come up with a mathematical formula to adjust for things like stock splits - when a company doubles the number of stocks its shareholders have, splitting the price of each in half - or new companies being added or removed. The idea is to keep the index consistent over time, and to make sure today's value can be compared in a meaningful way to what it was a year ago or 10 years ago. This can be done various ways mathematically, but at Dow Jones it is handled by changing the "divisor" - a number that is divided into the total of the stock prices. That divisor currently stands at 0.122820114.

Q: How does the index account for the fact some components are bigger than others?

A: The index is what's called a "price-weighted average," meaning expensive stocks have more influence over the number than lower-priced ones do. This is the case because the index is based purely on the dollar value of stocks; if a high-priced share goes up 20 percent, that's a greater dollar increase than a cheaper share's 20 percent jump. For example, a sharp drop in the price of General Motors last week didn't have a huge effect on the Dow because the automaker's stock was already so low. The stock fell $2.15, or 31 percent, on Thursday but only lowered the Dow by 17.1 points. GM's drag wasn't all that noticeable on day when the Dow plunged 679 points.

Q: Is the Dow considered a good measure of how the nation's companies are generally faring in the stock market?

A: Yes and no. Some on Wall Street downplay the importance of the average because it isn't as broad a measure as counterparts like the Standard & Poor's 500 index, which reflects the performance of 500 companies' stocks. Still, the Dow is the granddaddy of U. S. market indexes, and it offers a relatively easy-to-understand snapshot of how the market is faring. Analysts generally believe it is a useful tool when combined with other market indicators, including the S&P 500 and the Nasdaq composite, an index of shares on the tech-heavy Nasdaq stock market.

Monday, October 13, 2008

Hey, if you noticed, running down the side of my site are links to articles on specific news makers in different businesses. What the feed does is it pulls the most recent articles off of the web and links you to them, just as if you were to google search for the most recent articles on any of them. So, check out the articles and let me know if you want me to add anyone to the lists for easy access for you. Thanks.

Anyone know what's going on in the markets? There has been a global market downturn, a lot of countries stock markets have been plummeting and causing nervous investors to pull their money out due to fear of losing value. In the US a lot of baby boomers have money in the stock market and baby boomers are getting ready to retire so it is likely a lot of them have pulled cash out to preserve they money they still have so they don't hinder the retirement plans too much.

Every time you turn on the TV or you open up a financial news website it seems as if they are discussing how much worse the market can get and how much value each of these companies can continue to lose. Is that the right way to be looking at what is going on? As Warren Buffett would say, you want to be greedy when others are fearful and fearful when others are greedy. The one issue with that is: is it too soon? Has the market not bottomed yet? Will it continue to lose another 20 or 30%?

Its obviously a very tough decision to make, but Warren Buffett has invested, over the past 3 weeks or so, billions of dollars into at least 3 companies (GE, Goldman Sachs and Constellation Energy). He has an awfully good track record of investing so it may be a good idea to follow his lead, but at the same time, can you risk the market going into a further downturn?

This fear can change peoples points of view on money. This could scare them into realizing that they don't have enough money in emergency savings (if they even have an emergency fund). They can begin to realize that they shouldn't be in this position and they do not want to ever let it happen again, and they change there spending habits, so that instead of not saving any money each pay period, they now want to save 10%, well, where is that 10% coming from...they have to cut costs somewhere. My point is that people may stop spending or may cut back on spending their discretionary money, so there may be a lot more businesses that could be effected but it may not show until they release numbers with the lower cash flows taken into consideration.

It may very well be a time to buy, but be cautious because as you've seen with the market it can in any direction very quickly.

Welcome Soon to be Financially Savvy Individuals...

Welcome to my finance blog. This is a website for all people regarding personal finance. You cant always control how much you make, but you can do your best to make the most out of what you do make.

I will post articles from the internet that are interesting and helpful as well as give my opinions on things going on the in economy. I'm not a professional, they are just my opinons...

There are certain people who I really like hearing what they have to say, so I will post many articles by them, most of which have historically been quite enlightening, as well as certain sites that historically have great articles full of information to help you get the most from your money.

Thanks and leave feedback or e-mail me with anything else you want to hear or learn about. If I don't already know about the topic you want to hear about, I will learn it and write about it hopefully in terms that make more sense for you and I both.